INFLUENCE OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE OF LICENSED MICROFINANCE BANKS IN KENYA
Abstract
Capital structure is deemed to have an impact on a firm’s performance against the position held by Modigliani and Miller in their seminal work of 1958 when they stated that capital structure is irrelevant in investment decisions. The study was guided by the following specific objectives: To determine the effect of debt capital, equity capital and retained earnings on financial performance of licensed microfinance banks in Kenya. This study utilized descriptive research design. Empirical research method was used. It used panel data of five years due to the advantage that it had. It helped to study the behavior of each licensed microfinance bank over time and across space. In this study, the population consisted of all the licensed microfinance bank registered by the Central Bank of Kenya. According to the central bank of Kenya, there were 13 licensed microfinance banks in Kenya. The results revealed that the firm utilized trade credits to finance our microfinance banks. Further the findings indicated that, the licensed microfinance banks considered the use of asset based lenders to ensure consistency in capital flow. Similarly, the findings also indicated that the firm considered the financing through commercial finance companies as a means of raising their capital. The study recommended that the licensed microfinance banks should utilize trade credits to finance their microfinance banks. Also, the licensed microfinance banks to consider the use of asset based lenders to ensure consistency in capital flow. Overall the study revealed through statistical analysis that while equity has highest influence on profitability, retaining profits has a moderate influence while debt financing has least influence. This means MFBs should take debt financing with caution but should always encourage equity financing and retainance of profits when they intend to inject more capital into their business. Applying the findings could be of benefit to managers and shareholders of MFBs as well as to researchers and students interested in this area of study.
Key Words: Debt Capital, Equity Capital, Retained Earnings, Financial Performance
CITATION: Wangombe, B. G., & Kibati, P. (2019). Influence of capital structure on financial performance of licensed microfinance banks in Kenya. The Strategic Journal of Business & Change Management, 6 (2), 815 –835.
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DOI: http://dx.doi.org/10.61426/sjbcm.v6i2.1149
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